Policy shocks and stock market returns: Evidence from Chinese solar panels

We examine the stock market performance of publicly-listed Chinese firms in the solar panel industry over 2012 and 2013 in response to announcements of new import restrictions by the European Union and domestic policy changes by the Chinese government. Using daily stock market prices from the Shanghai-Shenzhen, New York and Hong Kong markets, we calculate abnormal returns to several policy changes affecting solar panels produced in China. We find, consistent with the Melitz (2003) model, that larger, more export-oriented firms experienced larger stock market losses in the wake of European trade restriction announcements. We further show that European trade policy had a larger negative effect on Chinese private sector firms relative to state owned enterprises. Finally, we use a two stage least squares estimation technique to show that firms listed on US markets are more responsive to news events than those listed in China and Hong Kong.